1099 and Independent Contracting

I recently rented a booth space as a contiguous shop. I am also working as a commissioned employee paying full taxes with zero deductions at a large spa. I will continue to do this until I have built clientele and transferred any existing clientele to my new space.

I've just spent the last three hours on the IRS website trying to figure out my tax obligations. No success because I'm not smart enough to figure out the instructions. What I think I have learned is that I must pay a quarterly tax from my income/profits and I need to determine my tax from estimated income calculations. Then I must also figure out what my deductions are. I file jointly with my spouse and I am also using my own SS as my tax ID for my business so you can imagine how convoluted things are looking right now.

Is this actually easier than it looks or am I better off contacting a CPA now instead of later this year like I planned?

My small business is currently at a loss due to it being so fresh, so expenses greatly outweigh income.

Tags: 1099, Tax, contracting, income, independent

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Permalink Reply by Marty Glenn on October 22, 2013 at 10:02am

Samantha,

First: Get a good CPA

Second: Talk to him / her about incorprating

Third: Stay off the IRS website :)

As a sole prop, all your income and expenses flow through your simple checking account. Your a basic short form unless you have a home and YOUR tax return and tax issues are very basic. Yes you should pay quarterly but I doubt you have income so what would you pay quarterly. A good CPA can help with this and YES talk to him / her sooner rather then later.

But a good rule of thumb is to always pay SOMETHING quarterly or on your return even if you file an extension. Get that point? A REFUND is not the IRS giving you money back, it is the IRS giving you money back that you over paid during the year as an interest free loan to the United States Treasury. But to protect yourself it is always a good idea to pay in rather then have a wait and see what happens attitude with regards to income and taxation.

Consider separating your business from you personally but unless you form an LLC or Corporation you cannot do this. Your CPA will tell you which entity to file based on your unique situation. The basic key will be this: Does the cost of the entity and the cost of the more complicated return come in less then the tax savings. You need a CPA to help with this math and depending on your situation their could be more deciding factors.

Things are not as convoluted as you might think. The IRS does not view your current situation any way other then income on a W2 and say tips or other related small income types. There is a line on your tax return for other income so don't worry the IRS has you covered and protected... :))

The quicker you get a CPA the better. Just an FYI: Annual fee for corporation is about $800 and the fee for a corporate return can run from $1,000 - $2,500 depending on the return and the CPA doing the return. Best of luck...

Marty

SkinCareScience.com

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Permalink Reply by Relax & Rejuvenate on October 22, 2013 at 11:06am

No success because I'm not smart enough to figure out the instructions.

I think the opposite is true... no rational being can understand government -- let alone tax -- double-speak

First, let's be clear. You are not an independent contractor and should have nothing to do with a 1099. You are an employee of another establishment with a W-2 and are starting your own business as a sole proprietor.

Marty is right -- your situation is not that complicated, but you should consider meeting with a tax/accounting professional.

By claiming 0 deductions/exemptions at your job, you are having the maximum income tax withheld for someone in your tax bracket. This is a good thing in terms of minimizing any tax liability surprised some April 15th.

Your small business income/loss is ADDED to your personal tax return and raises or lowers your AGI (adjusted gross income) accordingly. With losses, your income will go down, decreasing your tax liability and increasing the likelihood and amount the IRS will return to you. Yes, this is YOUR money, not theirs.

What is the ratio of W-2 earnings vs. your business revenue ( I know you are operating at a loss, but that loss may narrow if you find yourself depreciating items vs expensing them, not sure how you have been looking at these things in your calculus)

One of the first things you can figure out with your tax/accounting advisor is at what threshold of business income should you start making quarterly estimated tax payments. If you are operating at a loss, you won't have any tax liability. But you don't want to wait until the end of the year to figure this out and risk making a profit and being penalized for missing your Self Employed Tax installment payments. remember, FICA (social security and friends) are also due on SE earnings.

Its never too soon to meet with you accountant. Get your "buckets" set up so you know how to categorize your expenses.

Incorporating/LLC ing may or may not be necessary, but is not expensive in any case. I can't imagine ID being as onerous as CA or NY in such instances.

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Permalink Reply by Samantha Maline on October 22, 2013 at 5:02pm

Thank you, both of you. No Idaho is not as ornery. LoL. I'll find a good CPA and make sure all my ducks are in a row. This is all a new experience for me, which is why I'm doing it. :)